Ronald J. Cappuccio, J.D., LL.M. (Tax)

Counsellor at Law

1800 Chapel Avenue West, Suite 128

Cherry Hill, New Jersey 08002

Tel: (856) 665-2121

Fax: (856) 665-9005

E-Mail: Ron@TaxEsq.Com

We help you protect your assets from the IRS!

Ronald J. Cappuccio, J.D., LL.M.(Tax) is a Full Service, Business and Tax Law Firm emphasizing Personal and Business IRS Tax Negotiation, Offers In Compromise, Installment Agreements, as well as NJ Division of Taxation and IRS Audits, Delinquent Tax, and Tax Collections Issues, Employee and Independent Contractor issues, Payroll Taxes, Tax Liens, Wage Levy Release, Bank Levies and Seizures. We represent clients before the US Tax Court, US Court of Claims, NJ Tax Court and NJ Administrative matters.

We can help you establish a Limited Liability Company ( LLC ) which may be the best form of business organization, as well as Corporations, S Corporations, Partnerships, Limited Partnerships and Non-Profit organizations. We also can represent you in Buying and Selling a business.

I. LLC's are the predominate form of Business!

The limited liability company is authorized in New Jersey effective January 26, 1994. Since then, LLC's have become the predominate form of new business. As a result of the actions of the tax bar, since August, 1998, single member Limited Liability Companies are permitted in New Jersey.

II. Fundamental Tax Advantages

The essential advantage of a limited liability company is that it provides pass-through treatment without taxation at the entity level, essentially partnership tax treatment, while shielding members from personal liability. Multiple member LLC's are treated as a partnership and file a US Partnership Tax Return Form 1065. Single Member LLC's can be treated as a Sole Proprietorship and are taxed on the member's 1040 Schedule C. Limited liability companies then provide the advantage of protecting its members from the liabilities of debts and obligations, similar to corporate shareholders. It should be noted, however, that this limited liability has been continuously eaten away, particularly in the area of environmental law, and it is not expected that limited liability companies would fare any better. If a limited liability company is properly structured, it will be treated as a partnership pass-through entity.

III. General Tax Classifications

Because a limited liability company is an unincorporated business entity, the Internal Revenue Service will not treat it as a corporation unless it has more corporate characteristics than non-corporate characteristics. The Entity Classification Election filed with the IRS can specify whether the LLC will be treated as a Corporation, Partnership or Proprietorship. Because these fundamental rules have been established over a long period of time where taxpayers tried to classify entities as corporations, and the Internal Revenue Service tried to compel pass-through entity, the regulations favor pass-through status. Treasury Reg. § 301.7701-2 lists the following six characteristics in determining whether a business is subject to corporate taxation:

(1) Associates

(2) An objective to carry on business and divide the profits

(3) Limited liability

(4) Continuity of life

(5) Free transferability of interest

(6) Centralized management

IV. Limited Liability Companies in New Jersey

A. Organization. Limited liability companies are organized by filing a Certificate of Formation with the Secretary of State of New Jersey. A Certificate of Formation, N.J.S.A. 42:2B-11 requires the following:

(1) Name of the company

(2) Registered office and agent

(3) Certification of the founding members

(4) Date of dissolution of limited liability company

(5) "Other matters"

In the other section, it may be appropriate to the list the name of the "Tax matters member" for dealing with the Internal Revenue Service. The borrowing provisions of N.J.S.A. 42:2B-9 and the indemnification provision of N.J.S.A.42:2B-10 might also be appropriately included. The Secretary of State is contemplating adding a purpose clause to their form even though this is not required under the statute.

B. Operating Agreement. The Operating Agreement is an agreement between the members of a limited partnership, which govern the affairs of the business. However, unlike corporate By-laws, there is great flexibility in the Operating Agreement. N.J.S.A.42:2B-66 provides "This act is to be liberally construed to give the maximum effect to the principal of freedom of contract and to the enforceability of operating agreements."

C. Conclusion. The Limited Liability Company is an extremely flexible tool which has the limited liability advantages of a corporation and the tax advantages of a partnership or sole proprietorship.